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A Guide to Inheritance Tax in Scotland

Inheritance tax in Scotland is commonly referred to as a “voluntary tax” because, with some careful planning and advice, it can actually be avoided entirely. This is good to know as you might be unwittingly leaving your loved ones less than you expect, or else have to deal with a hefty bill yourself. Read our guide to inheritance tax in Scotland to be prepared for when the time comes.

What is inheritance tax?

Inheritance tax in Scotland is essentially a tax on the assets that you will leave behind for your loved ones or the assets you inherit from someone. It’s often considered a voluntary tax because, with careful planning, it can be entirely avoided. For example, according to the UK Government website, you do not have to pay inheritance tax if the value of your estate is under £325,000 or if you leave everything above this threshold to a spouse, civil partner, charity or community amateur sports club.

What is the rate of tax?

The current rate of inheritance tax in Scotland on death is 40% and 20% on lifetime transfers if it is possible to charge them. In the 2021/2022 year, the first £325,000 is considered the nil rate band, which means it is not chargeable to inheritance tax in Scotland and is at a rate of 0%. This nil rate band requirement is to continue until 5 April 2026.

However, the rate of tax for estates valued over this threshold amount might vary. According to the Gov.UK website, the threshold for the nil rate band goes up to £500,000 if you pass your estate to your children, including step-children, adopted, foster, or grandchildren.

Inheritance tax in Scotland says that there are charges for some lifetime gifts but if the donor survives more than seven years from giving them, the charges are ignored.

The residence nil rate band, on the other hand, is introduced when a qualifying residence is passed to direct descendants. The amount of relief has been set at £175,000 for 2021/2022 but this amount is doubled for married couples and registered civil partnerships.

Things to think about

  • Life assurance

Life assurance arrangements are often used as a way to remove value from an estate but are also a method of funding liabilities from inheritance tax in Scotland. You can get a policy that will cover your inheritance tax in the event of your death, which will be useful in providing the funds that might affect things like family company shares, which are not easily realised.

  • Trusts

Trusts are a good way to move assets out of an estate while still allowing the donor to retain some control over the final destination of the assets. Consultants at MM Legal can advise you on whether a trust is suitable for your needs and the various types of trusts you can use.

What MM Legal can do for you

You can read all the guides and tips you want about inheritance tax in Scotland but the reality of the situation is that it often needs to be tailored to you and your circumstances, MM Legal can help you out there. We can walk you through the process of inheritance tax in Scotland, including making sure your will is up to date to ensure that there are no nasty surprises for your loved ones when the time comes. Contact MM Legal today at our website mmlegal.co.uk for a free phone consultation.